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Today we’ll look at Toromont Industries Ltd. (TSE:TIH) and reflect on its potential as an investment.
To be precise, we’ll consider its Return On Capital Employed (ROCE), as that will inform our view of the quality of the business.

First of all, we’ll work out how to calculate ROCE.
Second, we’ll look at its ROCE compared to similar companies.
And finally, we’ll look at how its current liabilities are impacting its ROCE.

Return On Capital Employed (ROCE): What is it?

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business.
Generally speaking a higher ROCE is better.
Overall, it is a valuable metric that has its flaws.
Renowned investment researcher Michael Mauboussin has suggested that a high ROCE can indicate that ‘one dollar invested in the company generates value of more than one dollar’.

Does Toromont Industries Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful.
It appears that Toromont Industries’s ROCE is fairly close to the Trade Distributors industry average of 17%.
Independently of how Toromont Industries compares to its industry, its ROCE in absolute terms appears decent, and the company may be worthy of closer investigation.

TSX:TIH Last Perf February 10th 19

When considering this metric, keep in mind that it is backwards looking, and not necessarily predictive.
ROCE can be misleading for companies in cyclical industries, with returns looking impressive during the boom times, but very weak during the busts.
ROCE is only a point-in-time measure.
Future performance is what matters, and you can see analyst predictions in our freereport on analyst forecasts for the company.

Do Toromont Industries’s Current Liabilities Skew Its ROCE?

Short term (or current) liabilities, are things like supplier invoices, overdrafts, or tax bills that need to be paid within 12 months.
The ROCE equation subtracts current liabilities from capital employed, so a company with a lot of current liabilities appears to have less capital employed, and a higher ROCE than otherwise.
To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Toromont Industries has total assets of CA$3.1b and current liabilities of CA$1.1b.
Therefore its current liabilities are equivalent to approximately 35% of its total assets.
With this level of current liabilities, Toromont Industries’s ROCE is boosted somewhat.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St is a financial technology startup focused on providing unbiased, high-quality research coverage on every listed company in the world. Our research team consists of equity analysts with a public, market-beating track record. Learn more about the team behind Simply Wall St.

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